Harris Williams professionals regularly attend industry conferences and events. On the flight home, they share three key takeaways to help shape your strategy.
Report by: Brian Lucas, Managing Director, Business Services Group; Taylor Morris, Vice President, Business Services Group
Why is this industry on your radar?
Lucas: At this point in the business cycle, investors are looking for stable, counter-cyclical growth. That’s the definition of the waste management industry. It’s naturally diverse: household waste, documents, electronics, medical waste and industrial waste. It grows with the population and on the whole is highly cycle-resistant.
Morris: It’s also an industry in which huge synergies are possible through combining and professionalizing small and mid-sized businesses, or by absorbing them into larger operations. Ultimately, it’s a route-based business model, and there’s significant value to achieve by increasing route density, serving more customers with fewer people and trucks, and making routes more efficient.
Lucas: The last point is the difficulty of entry into these markets. There’s significant permitting involved, local regulations can vary significantly, and it’s a very relationship-based business. Both make it very difficult to start a business from scratch in this space. It’s much more efficient to buy your way into the industry by acquiring existing businesses, which gives your investment a degree of defensibility you don’t find everywhere.
Which trends, companies or business models were top-of-mind at the event?
Lucas: Tight labor and new technology were top-of-mind, and they really go hand in hand. Given the current labor market, it’s not easy recruiting people to work in the waste industry, particularly commercial truck drivers, who are in especially high demand.
In our experience with leading companies in the space, we’ve seen lots of different approaches to addressing this. We’ve seen clients focused on making drivers aware of their value to the company—driver of the year awards, for example. So there’s definitely awareness in the space of the importance of culture for retaining people.
Morris: Technology is the other side of the coin. If you can’t grow by adding people, new technologies can help fill the gap. Things like dynamic routing software that optimizes routes in real time, taking into account traffic patterns, accidents, road construction and weather. That relieves the need for more drivers and human routers while improving service levels and efficiency. There’s the emerging use of artificial intelligence in sorting, which can reduce personnel requirements, as can robotic arms on trucks that allow one person to handle a route on their own.
We’re also seeing new technologies that make the trucks smarter. Again, that includes things like dynamic routing showing up on a screen in the cab, as well as monitoring devices that record and track driver behavior, truck speed, time spent idling and other variables.
There’s also more real-time monitoring of maintenance and repair needs, which can help prevent breakdowns on the road. Some of these, including in-cab and back-up cameras, are focused on safety, while others are geared toward efficiency. Improving either area can have a substantial positive impact on costs and service levels, which ultimately helps the hauler rise above the competition.
What opportunities are they creating for strategic buyers and private equity investors?
Lucas: For smaller waste management companies, some of the technologies we just talked about are going to be out of reach, or off the table, simply given the costs to implement. Many of these companies survived the last recession and are still being run by the people who founded them decades ago, and they’d rather keep the cash in the business than spend it on technology, which often takes time to see the payback and comes with implementation risk.
We’re also seeing a trend in which the next generation of family-owned and -operated waste service businesses would rather do something else than run the family business, which tends to intensify the resistance to investing in technology, as well as the need to ultimately find the next owner for the business.
Overall, then, what we see is a solid opportunity for private equity to roll up small and mid-sized operators in a given region, implement some of the technologies and integration tactics we mentioned earlier, and work toward becoming regional leaders and acquirers-of-choice.
Morris: Strategic buyers in the industry can realize significant synergies by buying smaller operations: adding route density, implementing technology, rationalizing back-office operations, and adding profitable new services. Many of them have very sophisticated M&A functions and have been integrating smaller players successfully for years.
Lucas: This is still an incredibly fragmented space, and it’s difficult to imagine an industry that is more recession-resistant or ripe for the benefits of consolidation, technology and professionalization.
Published June 2019